China Says No To Fixing Steel Problem

China is producing much more steel than the country and the world can use, and is “dumping” it onto international markets. But when China was confronted with the dumping charge at a conference in Brussels this week, the Chinese government refused to back down.

The Chinese actions are causing steel operations around the world to shut down their own production and lay off workers. So far in the U.S., more than 13,500 steelworkers have been laid off or are facing layoffs.

China has again and again promised to reduce its steel production and help bring stability to world markets. Instead, China has actually increased production. In fact, the Alliance for American Manufacturing says, “Exports of Chinese steel last month were actually up 30 percent from where they were a year ago.”

A meeting in Brussels of the Organization for Economic Cooperation and Development (OECD) was called this week to discuss a “multilateral framework” for addressing China’s “structural overcapacity.” But China refused to commit to specific and timely actions to fix the problem.

Too Much Steel

Last week’s post, “The Big Fight Over Chinese Steel” explained that China has much more steel capacity than it needs and is flooding the market with steel at below-market prices to keep Chinese steelworkers employed.

China increased its steel production capacity by 540 percent between 2000 and 2014. Then the market slowed. To keep from having to lay off workers, China’s steel companies started “dumping” steel on world markets at below-market prices. As a result, steel companies outside of China, including in the U.S., have to lay off workers or close down.

[. . .] Current global overcapacity is estimated at 700 million tons – more than seven times what U.S. steelmakers can produce. This is expected to get worse.

[. . .] China, of course, wants to keep Chinese people employed. And China is a country that sees and does things as a country, not just a “market.” They have national industrial strategies that involve providing financing, low-cost energy, even free land to companies that operate according to the plan.

“Market” economy countries do not generally have national plans, so their companies compete individually against countries like China.

In the United States, 13,500 steelworkers hold layoff notices, and earlier this month, 750 U.S. Steel white-collar workers learned they’d lose their jobs, too. The crisis has hit aluminum just as hard. Five years ago, 14 aluminum smelters ran in this country. Now there are five. Another is slated to close in June. If it does, 6,500 aluminum workers will have lost their jobs. These are good, family-supporting jobs with benefits and pensions. This is China exporting unemployment.

OECD Failure

This week’s OECD meeting of representatives from 35 countries tried to come up with a resolution to the capacity problem. But China insisted it is doing nothing wrong. Politico’s Morning Trade explains:

China’s lead representative to the OECD talks, Assistant Minister of Commerce Zhang Ji, tried to explain the situation in terms everyone could understand. “Steel is the ‘food’ for industries and economic development,” Ji said. “After the international financial crisis, the key problem now is that the ‘food’ consuming parties are ill and have bad appetite, so it seems that there is too much ‘food.'”

The U.S. and other countries countered:

In contrast, U.S. Trade Representative Michael Froman and Commerce Secretary Penny Pritzker hailed a joint statement the United States reached this week with Canada, the European Union, Japan, Mexico, South Korea, Switzerland and Turkey calling for actions to reduce excess production capacity, including the elimination of subsidies. “It is our shared goal that other economies, including China, will come to recognize the value of these actions and will join our collective effort to address the causes of the current excess capacity problem,” Froman and Pritzker said.

What Next?

Will the U.S. and other countries take action and impose tariffs on Chinese steel (and other goods China is dumping on the market)? And even if they do, will they act quickly enough to save their own industries from collapse? Tuesday’s Morning Trade contained this:

“Unless China starts to take timely and concrete actions to reduce its excess production and capacity in industries including steel … affected governments – including the United States – will have no alternatives other than trade action to avoid harm to their domestic industries and workers,” U.S. Trade Representative Michael Froman and Commerce Secretary Penny Pritzker said in a statement after the steel talks.

They talk about [trade deals] like it’s a lease on an storefront in Indianapolis, where what’s written down on paper really determines what happens. A deal is a deal, and once made, courts can be relied upon to enforce whatever was agreed to.

… Instead, international law is analogous to the rules of a game of stickball being played by children on a vacant lot: its rules only mean anything insofar as they are enforced by the players upon themselves.

– But the players also won’t enforce any rule grossly to the disadvantage of any particularly powerful player, because there’s no sovereign with the power to do so.

The U.S. talks about setting up “rules” but rarely enforces those rules. They expect the international mechanisms to just work. But that is not how the game is played. There is “no sovereign” to enforce things on the most powerful players. “And therefore … a trading model based upon neutral and consistent enforcement of legal obligations is not feasible.”

Unfortunately, this is precisely the concept of law that many American politicians bring to trade agreements, because that’s what they were taught in domestic law schools and what they were used to, back before they were elected to Congress and had a law practice in their district.

There is no way to take power politics out of trade, which means that there is no way to leave everything in the hands of a neutral and rational free market once we but construct the right international legal machinery.

Seeing ourselves as a market with rules rather than a country up against countries, we take the power we would otherwise have out of our trade relationships. The result? We are left “naked”…

… in a world where other nations pursue the most sophisticated mercantilist policies their bureaucrats can devise, backed up by disciplined diplomacy that puts economic objectives first and doesn’t take treaty law too literally.

Our nakedness has, ironically, made us even more desperate in pushing for free trade: Having disarmed ourselves by throwing open our markets, we desperately need to disarm everyone else by forcing their markets open, too. But we try to do this after having thrown away our principal leverage: access to our own market.

As long as we refuse to see ourselves as a country and act as a country, countries that do see themselves as countries – like China – will have the advantage.

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.